Introduction

On March 15, 1994, Michigan voters will render a decision
on an important question relating to public school finance-one of the most
complex propositions ever placed on the ballot here. "Proposal A" offers a mix
of taxes to replace property taxes for schools eliminated by the legislature and
Governor Engler last summer, as does a "back-up" or "statutory" plan that will
automatically take effect if Proposal A fails.

The elements of these two plans are numerous and
complicated. Important constitutional questions are involved. The ability of
local and state governments to raise taxes from the levels each plan would
initially establish ought to be important to taxpayers as they consider their
options. And what the voters are buying for their money under each plan is not
to be ignored either. These are but a few of the factors that carry weight in
the March 15 decision, but they are not the subjects of this paper.

The focus of author Dean Stansel's analysis is the
question, "Which impacts a state's economy with the least negative effects, the
sales tax or the income tax?" This question, though it is one of many that
voters must consider, is nonetheless central to the choice between Proposal A
and its statutory alternative. Proposal A would raise the sales tax from 4% to
6% and cut the flat-rate personal income tax rate from 4.6% to 4.4%. The
statutory plan would leave the sales tax unchanged and raise the income tax rate
to 6%.

The U.S. Advisory Commission on Intergovernmental
Relations (ACIR) calculates relative "tax capacity" and "tax effort" for every
state. Tax capacity is an estimate of the amount of revenue a state would
collect if it utilized a "representative" tax system comprised of national
average tax rates applied to commonly used tax bases. A state's tax effort is
the ratio of its actual revenues to its estimated capacity. According to ACIR
data for 1991, Michigan's sales tax capacity ranked 24th, at 3 % below the
national average, while the state's sales tax effort ranked 43rd, at a
substantial 31% below the national average. Michigan's personal income tax
capacity, meanwhile, ranked 18th, at just 1% below the national average, while
its personal income tax effort ranked 27th, at 4% above the national average. At
least in relation to the other states, it would appear that Michigan has less
"room" to raise its income tax than it does to raise its sales tax.

Dean Stansel draws a clear conclusion on the issue of
sales vs. income taxes and their relative economic effects. His finding should
be helpful to voters as they decide how they will vote on March 15, but it
should not by itself make the decision for them.

Finally, school finance is inevitably tied up with
what it is we are financing. The Mackinac Center for Public Policy has made
it plain in other forums that neither Proposal A nor the statutory plan buys us
the sort of fundamental reform our educational system desperately needs.
Irrespective of the March 15 outcome, the Governor and the legislature should
work for those initiatives that will infuse competition and parental choice into
the system, contain excessive costs through more contracting with the private
sector, liberate teachers from stifling mandates and bureaucracy, and expand
charter schools.

----Lawrence W. Reed, President, The Mackinac Center for
Public Policy

For years, the effect of state and local taxes on economic
growth has been a topic of much debate. Until the mid-1970s the conventional
wisdom was that state and local taxes did not substantially affect economic
decision-making. More recently, however, there is a growing body of empirical
research which suggests otherwise. Many economists now agree that high and
rising state and local tax burdens can significantly inhibit economic growth,
and further, that some taxes can be far more harmful than others.

Economic theory speaks clearly on how the various kinds of
taxes can affect economic growth. More specifically, there is little
theoretical disagreement with the assertion that consumption taxes are less
harmful to economic growth than are income taxes.